CPA recommendation for Florida Retirement System QDRO

[J-Lo]

I would appreciate some guidance or recommendation for a CPA or Tax Professional. Spouse retired 7 years ago and would not execute QDRO for AP. After much litigation, court will be ordering enforcement of marital settlement agreement providing 50% of FRS Defined Benefit at the time of retirement. There’s quite a lot of retro money that will be paid. Retiree’s attorney wants to make a partial lump sum payment to lower interest prior to final judicial order to enforce QDRO. Alternate payee needs tax advice regarding pre QDRO lump sum payment and post  QDRO retroactive payments. Basic question…is a payment made prior to QDRO enforcement taxed the same as a payment post QDRO?

[fmsinc]

The basic rule at OPM is that they do not make retroactive payments if the former spouse's share of the employee retirement annuity has already been paid to the employee.  So any payments made by OPM to the former spouse will be taxable to the former spouse and not included in the income of the employee. That is the way it's intended to be. 

Let's first deal with the arrears:

"§ 838.234 Collection of arrearages.
Specific instructions are required before OPM may pay any arrearage. Except as provided in § 838.225(b), OPM will not increase a former spouse's share of employee annuity to satisfy an arrearage due the former spouse. However, under § 838.225, OPM will prospectively honor the terms of an amended court order that either increases or decreases the court order's entitlement."

This would seem to suggest that there must be a "amended" court order directing OPM to add $X to the former spouse's payment in order to collect arrears.  Or maybe not.  

But: 

"§ 838.235 Payment of lump-sum awards.
If a court order acceptable for processing awards a former spouse a lump-sum amount from the employee annuity and does not state the monthly rate at which OPM should pay the lump-sum, OPM will pay the former spouse equal monthly installments at 50 percent of the gross annuity (subject to the limitations under § 838.211) at the time of retirement or the date of the order, whichever comes later, until the lump-sum amount is paid."  

But we are not dealing with a lump sum payment is the payments to the former spouse is being paid as an annuity. 

These CFR regs are talking about a preexisting arrears created in the manner you address in your question, that is, a party refuses to sign the Court Order Acceptable for Processing and retires (or is already retired).  It is not called and  QDRO and if you do OPM will reject it.  So (ignoring for a moment the "amended" language,) you would ask your judge to award the percentage or amount or formula amount due for the Agreement or Court Order, for example, "plus $500/month for 90 months", or come up with a formula that includes the arrears, and hope OPM is okay with it.  

But your question relates to the tax impact of payments of arrears made directly from the employee to the former spouse and not by OPM: (i) they are not alimony, and even if they were alimony they would not be deductible by the employee or taxable to the former spouse; (ii) they are not a payment of taxable income by the former spouse that would make them subject to state and Federal tax withholding. What I would do is determined the total arrears to be paid plus prejudgment interest at the Florida judgment rate, 9.15%, deduct what would be the former spouse's state and Federal tax burden (not FICA or Medicare), add and that is what he pays her as a lump sum.

Good Luck.

David

[david rigby]

@fmsinc  Can you add a link to what you are quoting?

[J-Lo]

Thanks David…very helpful.

[blguest]

@david rigby

5 CFR § 838.234 - Collection of arrearages
https://www.law.cornell.edu/cfr/text/5/838.234

5 CFR § 838.235 - Payment of lump-sum awards
https://www.law.cornell.edu/cfr/text/5/838.235